- USD/JPY remains sturdy above 161.00 as the Japanese yen weakens significantly.
- The BOJ sees further policy tightening due to the tender yen.
- Weak US manufacturing PMI weighs on the US dollar.
USD/JPY moves above 161.00 during Monday’s session in New York. The asset is strengthening further as the Japanese yen weakens amid uncertainty over the Bank of Japan’s policy outlook. The latest BOJ policy minutes show that officials have been in favor of further tightening as the tender Japanese yen increases inflationary pressures.
The sheer depreciation of the Japanese currency made exports more competitive and drove up the cost of imports. Growing speculation about further interest rate increases appears to be unpleasant for investors as they expect that the spiraling wage growth should be a reason for further tightening of policy.
In addition, expectations of Japanese intervention in the FX are high as the yen has weakened to a multi-decade low against the US dollar (USD). The Japanese administration has warned of covert intervention against rapid, unilateral FX moves.
Meanwhile, the US dollar is under pressure due to tender ISM Manufacturing PMI data for the United States (US) for June. The manufacturing PMI, which measures activity in the factory sector, unexpectedly fell to 48.5. Economists expected factory activity to improve to 49.1 from the previous published reading of 48.7. A result below the 50.0 threshold is considered a contraction in productive activity.
Manufacturing inflation also fell as the price paid index, which shows prices paid for factors of production such as raw materials and wages, rose more slowly to 52.1 from estimates of 55.9 and an earlier reading of 57.0.
The decline in prices paid suggests weakening price pressures. This will raise expectations for an early rate cut by the Federal Reserve (Fed).
Economic indicator
ISM PMI for manufacturing
The Institute of Supply Management (ISM) The Manufacturing Purchasing Managers Index (PMI), published monthly, is a leading indicator measuring business activity in the U.S. manufacturing sector. This indicator is derived from a survey of manufacturing supply executives based on information they have collected within their organization. Survey responses reflect changes, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is expanding overall, which is a bullish signal for the US dollar (USD). A reading below 50 signals that factory activity is generally degenerating, which is seen as bearish for the USD.
